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CHAPTER 2
Business Combinations
BRIEF EXERCISES
For a business combination to occur, there has to be an economic transaction between two
entities.
Control exists when the investor is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over
the investee.
A business is an integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners, members or participants.
Solutions Manual Copyright © 2013 John Wiley & Sons Canada, Ltd. 1
Usually, an obligation of the acquirer to transfer additional assets or equity interests to the
former owners of an acquiree as part of the exchange for control of the acquiree if specified
future events occur or conditions are met. However, contingent consideration also may give
the acquirer the right to the return of previously transferred consideration if specified conditions
are met.
The consideration transferred includes any asset or liability resulting from a contingent
consideration arrangement. This is measured at fair value at acquisition date.
The acquirer shall classify the obligation to pay contingent consideration as a liability or equity.
Changes in the measurement of the obligation subsequent to the acquisition date resulting
from events after the acquisition date are accounted for differently depending on whether the
obligation was classified as equity or debt.
If it is classified as equity, the equity shall not be remeasured and the subsequent settlement is
accounted for within equity.
If it classified as a financial liability, it is accounted for under IAS 39 and is subsequently
measured at fair value with movements being accounted for in accordance with that standard.
Any adjustments are recognized in profit or loss.
Because the assets and liabilities are measured at fair value, the assets and liabilities are
recognized regardless of the degree of probability of inflow/outflow of economic benefits. The
fair value reflects expectations in its measurement.
The assets and liabilities recognised must meet the definitions of assets and liabilities in the
Framework.
The assets and liabilities recognised must also be part of the exchange transaction rather than
resulting from separate transactions.
In recognizing the assets and liabilities, it is necessary to classify or designate them. The
acquirer does this based on the contractual terms, economic conditions, its operating or
accounting policies, and other pertinent conditions that exist at the acquisition.
Solutions Manual Copyright © 2013 John Wiley & Sons Canada, Ltd. 2
Solutions Manual to accompany Fayerman: Advanced Accounting−Updated Canadian Edition Chapter 2
Control is the power to govern the financial and operating policies of the acquiree so as to
obtain benefits from its activities.
Determination of the acquirer sometimes requires judgement. IFRS 3 provides some indicators
to assist in assessing which entity is the acquirer:
Is there a large minority voting interest in the combined entity? The acquirer is usually
the entity that has the largest minority voting interest in an entity that has a widely
dispersed ownership.
What is the composition of the governing body of the combined entity? The acquirer is
usually the combining entity whose owners have the ability to elect, appoint or remove a
majority of the members of the combined entity’s governing body.
What is the composition of the senior management that governs the combined entity
subsequent to the combination? This is an important indicator given that the criterion for
identifying an acquirer is that of control.
What are the terms of the exchange of equity interests? Has one of the combining
entities paid a premium over the pre-combination fair value of one of the combining
entities, an amount paid in order to gain control?
Which entity is the larger? This could be measured by the fair value of each of the
combining entities, or relative revenues or profits. In a takeover, it is normally the larger
company that takes over the smaller company (that is, the larger company is the
acquirer).
Which entity initiated the exchange? Normally the entity that is the acquirer is the one
undertakes action to take over the acquiree.
What are the relative voting rights in the combined entity after the business
combination? The acquirer is usually the entity whose owners have the largest portion
of the voting rights in the combined entity
Solutions Manual Copyright © 2013 John Wiley & Sons Canada, Ltd. 3
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